Stephen S. Cohen and J. Bradford DeLong (2010), The End of Influence: What Happens When Other Countries Have the Money (New York: Basic Books: 9780465018765).

When you have the money--and "you" are a big, economically and culturally vital nation--you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly--though, hopefully, in quiet, nonconfrontational ways. An you lose influence--the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don't. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time.

A large and very good literature starting with Werner Sombart (1906), Why Is There No Socialism in the United States, to which a most recent and impressive contribution is TonY Judt (2009), "What Is Living and Dead in Social Democracy?" *New York Review of Books 56:20 (December 17) http://www.nybooks.com/articles/23519, stresses the gulf between western Europe's confident and assertive social democracy and the smaller and somewhat shamefaced social insurance state and programs in the United States.

We think, as we note before, that too much can be made of this gap: both sides of the North Atlantic did follow what we see as broadly similar trajectories, especially when you recognize the role that national borders between north and south and west and east Europe have played in creating European countries with much more homogeneous populations in wealth than in the entire continent-spanning United States.

Still worth reading after is Daniel Bell (1960), "The End of Ideology in the West," in The End of Ideology (Cambridge: Harvard University Press).

See Barry Eichengreen (2008), The European Economy since 1945: Coordinated Capitalism and Beyond (Princeton: Princeton University Press: 9780691138480); Stephen S. Cohen (1969), Modern Capitalist Planning: The French Model (London: Weidenfeld and Nicholson); Warren C. Baum (1958), The French Economy and the State (Princeton: Princeton University Press); David S. Landes (1951), "French Business and the Businessman: A Social and Cultural Analysis," in E. M. Earle, ed. (1951), Modern France (Princeton: Princeton University Press), pp. 334-53.

Edwin Truman of the Peterson Institute for International Economics was among the first and has been the most effective worrier about what the rise of these government-owned asset accumulations means for the global economic system. His recommendation is that governments be urged to adopt [A Blueprint for Sovereign Wealth Fund Best Practices](A Blueprint for Sovereign Wealth Fund Best Practices).

"Except for US Treasuries, what can you hold?… For everyone, including China, it is the only option…" Mr. Luo whose English tends towards the colloquial added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do…”

The go-to place for information on the U.S.-China balance of financial terror and on China's reserve and other accumulations used to be the weblog of Brad Setser, "Follow the Money". Setser is now working for the Obama administration, and we have not found anything since as useful and informative.

One of the most fascinating undercurrents in Winston Churchill's (1947) six-volume memoir History of World War II is the tension between Churchill's wish to express gratitude for the selfless and ample aid given by Roosevelt to Britain before Pearl Harbor and Churchill's wish that that aid had been even more ample and more selfless. But even if Franklin Roosevelt had wished in the end to send American boys to storm the beaches of Normandy to preserve the British Empire as it had been in 1939, no other American power-holder would have so wished. And Roosevelt also did not.

The United States's trajectory is unique in that it has become a debtor nation before it has lost its military, technological, economic, and indeed financial preeminence. Previous transitions to the extent that they are analogous--Holland to Britain in 1700 and Britain to the U.S. in 1914 come to mind--have seen military power pass first, then technological, then economic broadly-speaking, and financial last, with the previous leader retaining large net foreign asset holdings for further decades. That the financial stability of the world's military and technological superpower already depends on maintaining the confidence of foreign bondholders is something new under the sun. So far there are no signs that that confidence is in any question--indeed, the sharp strengthening of the U.S. dollar and the sharp fall in long-term Treasury rates when the financial crisis intensified in the fall of 2008 is powerful evidence that that confidence is not even in question.

Relevant here are Charles Kindleberger's worries that the Great Depression was, in some deep sense, the result of a failed transition in international economic "hegemony" from Britain to the United States. See Peter Temin (2003), "Obituary for Charles P. Kindleberger," EH.Net.

This is the basic rationale for international trade--that it allows an economy to offload to others those sectors in which its labor and capital and organizations are (relatively) unproductive and focus instead on those sectors in which its labor and capital and organizations are (relatively) more productive. That is the underlying logic of Ricardian comparative advantage.

It is easy to argue that up through 2000 that increased global integration was a major win for the United States, not only raising current consumption levels but boosting long-run growth as well by allowing the U.S. to shift resources into high-tech computing and communications. See, for example, Greg Linden, Jason Dedrick and Kenneth L. Kraemer (2009), "Innovation and Job Creation in a Global Economy: The Case of Apple’s iPod" (Irvine: U.C. Irvine Personal Computing Industry Center).

It is much more difficult to argue that the post-2000 increase in integration was to the long-run benefit of the U.S.: innovation in mortgage finance and in other derivatives no longer looks to be the industry of the future. See Simon Johnson (2009), "The Quiet Coup,"Atlantic Monthly (May).

Missing from this paragraph is the point that the United States not only got a high (and unsustainable) level of consumption from the capital inflow from countries abroad pursuing policies of undervalued currencies and export-led development, but the United States gained political and strategic benefits as well. Serving as the global economy's balance wheel and importer of last resort does boost the wealth and strength of those interests in other countries that want to trade with America. The hope is that these interests will also be interested in world peace and democracy, and be able to exert their political will domestically.

The history of U.S.-British relations since 1845 from the British point of view suggests that there is something to this: run an open world economy and the rising superpower across the ocean to the west may in the long run become your friend rather than your master, or at least your friendly master.

The classic studies of the amount of economic growth due not to more workers or more capital are Moses Abramovitz (1956), "Resource and Output Trends in the United States Since 1870," American Economic Review 46:2 Papers and Proceedings (May), pp. 5-23: http://www.jstor.org/stable/1910656; Robert M. Solow (1957), "Technical Change and the Aggregate Production Function," Review of Economics and Statistics 39:3, pp. 312–320.

Back before technological and organizational progress was a first-order factor in economic growth--back before the start of the nineteenth century, say--you could argue with a straight face that decentralized competitive markets would indeed produce the best of all possible economic worlds. The "system of natural liberty" that provided individuals with complete legal title to all chattel and real property and allowed them to trade with each other without hindrance would perform the triple functions of (a) making sure that the goods produced went to those who valued them the most, (b) making sure that everything produced would be valued at more in expectation than its resource cost, and (c) making sure that cost-effective ways of boosting society's productive capabilities would be profitable, hence likely to be undertaken. See Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations (London: Strahan and Cadell). (With distortions produced by an unequal distribution of income being the principal fly from a utilitarian standpoint in the system-of-natural-liberty soup.)

But once technological and organizational progress becomes the first-order factor in economic growth--accounting for two-thirds of long-run growth in incomes, productivity levels, and living standards in the U.S. today--this theoretical congruence and harmony between private profits and public utility evaporates. See, for example, Paul Romer (1990), "Endogenous Technical Change," Journal of Political Economy.

As a historical curiosity, there are some signs that Adam Smith knew or should have known that the spread of ideas and inventions was about to become a key factor in economic growth, and Smith certainly knew about and was very interested in John Roebuck's local Carron Ironworks, in Falkirk, Scotland. See Michael Perelman (2000), The Invention of Capitalism: Classical Political Economy and the Secret History of Primitive Accumulation (Durham, NC: Duke University Press: 9780822324911); Charles Kindleberger (1976), "The Historical Background: Adam Smith and the Industrial Revolution," in Thomas Wilson and Andrew S. Skinner (1976), The Market and the State: essays in Honour of Adam Smith (Oxford: Clarendon Press); Gavin Kennedy (2005), Adam Smith’s Lost Legacy (London: Palgrave Macmillan).

John Stuart Mill's call for an "infant industry" exception to free trade is in Book V, Chapter X of his Principles of Political Economy, with Some of Their Applications to Social Philosophy. See the 1909 Ashley (7th) edition published in London by Longmans, Green: http://www.econlib.org/library/Mill/mlPCover.html:

The only case in which, on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country. The superiority of one country over another in a branch of production, often arises only from having begun it sooner. There may be no inherent advantage on one part, or disadvantage on the other, but only a present superiority of acquired skill and experience. A country which has this skill and experience yet to acquire, may in other respects be better adapted to the production than those which were earlier in the field: and besides, it is a just remark of Mr. Rae, that nothing has a greater tendency to promote improvements in any branch of production, than its trial under a new set of conditions. But it cannot be expected that individuals should, at their own risk, or rather to their certain loss, introduce a new manufacture, and bear the burthen of carrying it on until the producers have been educated up to the level of those with whom the processes are traditional. A protecting duty, continued for a reasonable time, might*89 sometimes be the least inconvenient mode in which the nation can tax itself for the support of such an experiment. But it is essential that the protection should be confined to cases in which there is good ground of assurance that the industry which it fosters will after a time be able to dispense with it; nor should the domestic producers ever be allowed to expect that it will be continued to them beyond the time necessary for a fair trial of what they are capable of accomplishing...

Note that for our argument to be relevant, we do not require that attempts to pursue innovation-capturing industrial policies succeed. We expect the bulk of them to fail. The point is that such attempts are likely to take place, and are likely to be negative sum for the world as a whole. As economist Lant Pritchett puts it, the true curse is the pursuit of state-led development by what are nearly invariably anti-developmental states.

Back in 1993 when then-Treasury Secretary Lloyd Bentsen committed the misstep of not claiming that he wanted to see a stronger dollar--"well, I would like to see a stronger yen" he said when asked if he wanted to see a weaker dollar--it was a political misstep only, with few or no fundamental economic consequences. Today his successor Treasury Secretary Timothy Geithner is in a somewhat different position: there are potential economic consequences for the level of long-term Treasury interest rates and the cost of financing the U.S. national debt. See, for example, Simon Johnson (2009), Mr. Geithner Goes to China,"The Baseline Scenario (May 30).

This section is much too compressed--recall that one of the authors is, or at least was until recently, a card-carrying neoliberal economist himself. Briefly, the inflation of the 1970s and the resulting macroeconomic turmoil of the early 1980s created a presumption in political and policy circles that in any specific case the government failures that would result from increasing the role of the state were likely to be more damaging than the market failures that would result from decreasing the role of the state. This presumption was rebuttable. But it was very real.

One thing that the financial crisis that started in 2007 and the resulting recession that started in 2008 have done is to eliminate this presumption: as far as derivative and mortgage markets are concerned, government failure was clearly not the number one thing that we should have been worrying about.

We, at least, are impressed and somewhat surprised by how little political demand for the restriction of imports has been generated by what we must now call the crisis of 2007-2010--with Senator Charles Schumer (D-NY) being somewhat of an exception: see "NY Sen. pressures NBA to Stop Adidas Jersey Plan," Associated Press (November 29, 2009).

What Lawrence Summers has long called the global balance of financial terror. China now has a larger relative stake in the continued strength and stability of the U.S. dollar than the United States does. Summers, however, cautions that it would not be "prudent for [the United States] as a country" to rely on the stability of this configuration. See, for example, Lawrence Summers (2004), "The United States and the Global Adjustment Process" (Washington: Peterson Institute for International Economics: Third Niarchos Lecture).

The best two things written we have seen on the attempt to corral these non-market actors into market-actor patterns of behavior are Brad W. Setser (2008), Sovereign Wealth and Sovereign Power: The Strategic Consequences of American Indebtedness (New York: Council on Foreign Relations: 0876094159); Edwin Truman (2007), Sovereign Wealth Funds: The Need for Greater Transparency and Accountability (Washington: Peterson Institute for International Economics: Policy Brief 07-6). Our belief is that this attempt is unlikely to succeed in the long run. However, as we discuss below, the extremely sharp Peter F. Drucker wrote a generation and a half ago that American pension funds' wealth accumulations would fundamentally change the playing field, and he was wrong: they were corralled.

See, for example, Winston S. Churchill (1947), Their Finest Hour (London: Macmillan), p. 56, on the bill passed by Parliament and assented to by the King-Emperor on May 22, 1940, giving the government:

power by Order in Council to make such Defence Regulations making provision for requiring persons to place themselves, their services, and their property at the disposal of His Majesty as appear to him to be necessary or expedient for securing the public safety, the defence of the Realm, the maintenance of public order, or the efficient prosecution of any war in which His Majesty may be engaged, or for maintaining supplies or services essential to the life of the community...

See Diane Kunz (1991), The Economic Diplomacy of the Suez Crisis (Chapel Hill: UNC Press: 0807819670). The British Conservative Party government appears to have believed that it could not prevent a devaluation of the pound should U.S. President Eisenhower order his Secretary of the Treasury George Humphries to dump sterling assets, and that it could not politically survive a devaluation of the pound and the resulting deterioration in the United Kingdom's international terms-of-trade. Why Chancellor the Exchequer Harold Macmillan and Prime Minister Anthony Eden believed that they were so vulnerable is somewhat of a mystery: lots of governments have undergone devaluations and depreciations--and politically not just survived but flourished.

On how America used its possession of the money to attempt to remake the post-WWII world to its liking, see, for example, Michael J. Hogan (1989), The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1947-1952 (Cambridge: Cambridge University Press: 0521378400); J. Bradford DeLong and Barry J. Eichengreen (1993), “The Marshall Plan: History’s Most Successful Structural Adjustment Program,” chapter 8 in Rüdiger Dornbusch, Wilhelm P. Nölling, and Richard G. Layard, eds. (1993), Postwar Economic Reconstruction and Lessons for the East Today (Cambridge: MIT Press: 0262041367).

On this and other forms of "soft power" more generally, the best thing we have seen is still Joseph Nye (2004), Soft Power: The Means to Success in World Politics (New York: PublicAffairs: 1586482254).

Monday, October 19, 2009

People on the American side of the Atlantic ocean often do not notice how this shift in relative global influence from Britain to the United States is viewed by many, at least by many in Great Britain.

(p. xv) Churchill fought to preserve Britain and its Empire against Nazi Germany. Keynes fought to preserve Britain as a Great Power against the United States. The war against Germany was won; but, in helping to win it, Britain lost both Empire and greatness...

In Skidelsky's judgment, it was a shame that Hitler's being:

(p. xxi) in charge of a great nation... threw Britain into the arms of America as a suppliant, and therefore subordinate: a subordination masked by the illusion of a 'special relationship'...

And he speaks of the:

(p. xx) ...intensity and often bitterness of the struggle between Britain and America for post-war position which went on under the facade of the Grand Alliance. When the European war started, Britain, not Germany, was seen by most American leaders as America's chief rival...

He even regrets:

(p. 180) ...the deference Britain paid to America's wishes... and its failure to exploit crucial elements in its bargaining position--like fighting a more limited war, or even making a separate peace with Germany..."

Skidelsky is not alone. Paul Kennedy, a British historian at Yale, wrote of how:

...the overtaking of Britain by the U.S. a century ago also involved two democracies, and the declining country found the process a painful one...

Americans tend to view it very differently. From the American perspective, between Britain's compromise over the Oregon Territory in the 1840s (a very unusual thing for the nineteenth-century British Empire to do: usually they did not compromise but rather burned your capital and then dictated terms) and the start of World War I the British government pursued a generations-long strategy of wooing America--convincing it that its interests were close to and its values identical to those of Britain. This succeeded--and as a result America was, for British foreign policy, the equivalent of being initially dealt wired aces in seven-card stud throughout the twentieth century

(Note that in the American edition, the title of Skidelsky's third volume was changed to John Maynard Keynes: Fighting for Freedom.)